Combine Nifty & Nifty Next 50 funds to create large, mid cap index portfolios

Published: February 7, 2019 at 10:53 am

Here is how you can combine NIfty 50 (Nifty or N50) and Nifty Next 50 (NN50) index funds to create large and mid cap index portfolios. Since both N50 and NN50 index funds have been around for many years, index investors can use these two instead of new or low AUM ETF or index fund like Nifty 100, Nifty 100 Equal Weight, Nifty Midcap 150 or Nifty Large Midcap 250.

The advantage with building an index portfolio by combining two non-overlapping index funds is flexibility. Its risk and reward potential can be adjusted as per market condition or as per the goal. Tactical asset allocation is also possible as discussed between large and small caps here: Profit Booking from Small Cap Mutual Funds: Does it work?

In what follows we shall consider different combination results and discuss their return and risk for different durations, you can check the video version below for how this was done. The idea is to choose a combination of Nifty 50 and Nifty Next 50 that closely resembles a given index in terms of risk and reward. A 100% match is not possible for any possible duration, but a close enough fit will suffice.

We shall start with the NIfty 100 Equal Weight Index. This has the top 100 stocks from the NSE in equal proportions. You can read more about it here: Will large cap mutual funds struggle to beat Nifty 100 Equal Weight Index?

Combine Nifty & Nifty Next 50 funds to create large, mid cap index portfolios

Note: The blend portfolios are constructed with daily rebalancing wich is clearly an overkill. In real life, a blend portfolio will be rebalanced once a month by an institution (eg. Nifty Large Midcap 250) or once a year by an individual investor. So the experience is likely to vary. The blend proportions will have to be reconstituted after comparing returns on a case to case basis,

Nifty 100 Equal Weight Index with 50% NN50 and 50% N50 (10 years)

This is a 50:50 blend over ten years. Rolling returns are shown in the top panel and the rolling standard deviation (risk) is shown in the bottom panel. The match in returns is reasonable, but the blend has more volatility

Nifty 100 Equal Weight Index with 50% NN50 and 50% N50

Nifty 100 Equal Weight Index with 50% NN50 and 50% N50 (15 years)

The 50:50 blend outperforms the Nifty 100 Equal Weight over 15 years though (with a little more risk)

Nifty 100 Equal Weight Index with 50% NN50 and 50% N50 (15 years)

Nifty 100 Equal Weight Index with 40% NN50 and 60% N50 (15 years)

A lower NN50 weight to 40% or less may match returns with N100EW better over the long term

Nifty 100 Equal Weight Index with 40% NN50 and 60% N50 (15 years)

Next we shall consider different combinations of Nifty 100. This is a capitalization-weighted index of the top 100 stocks in the NSE and only a little bit of NN50 would suffice for a decent match. You can read more about the importance of the Nifty 100 here: Only Five Large Cap funds have comfortably beat Nifty 100!

NIfty 100 with 20% NN50 and 80% N50 (10 years)

NIfty 100 with 20% NN50 and 80% N50 (10 years)

NIfty 100 with 20% NN50 and 80% N50 (15 years)

NIfty 100 with 20% NN50 and 80% N50 (15 years)

NIfty 100 with 10% NN50 and 90% N50 (10 years)

NIfty 100 with 10% NN50 and 80% N50 (10 years)

NIfty 100 with 10% NN50 and 90% N50 (15 years)

NIfty 100 with 10% NN50 and 80% N50 (15 years)

One can see that even 10% NN50 is even to reproduce the risk and a reward of N100 over 10 and 15 years. A portfolio with 20% NN50 could possible outperform N100 with higher volatility.

Next is the Nifty Large Midcap 250. This is 50% of Nifty 100 and 50% of Nifty 150.

NIfty Large Midcap 250 with 30% NN50 and 70% N50 (10 years)

NIfty Large Midcap 250 with 30% NN50 and 70% N50 (10 years)

There is not enough data to check for 15 years. Next we have the Nifty Midcap 150.

NIfty Midcap 150 with 50% NN50 and 50% N50 (10 years)

Even a mid cap fund can be replicated with this blend portfolio. It is amusing that the blend has a higher volatility than the midcap index. This is the reason I keep warning that Nifty Next 50 is NOT a large cap index!

NIfty Midcap 150 with 50% NN50 and 50% N50 (10 years)

One can even try to match Nifty 200 or Nifty 50 equal weight with this blend the NN50 exposure could be quite small. Someone asked on YouTube (see video below) about Nifty low volatility 30. Since this index has a lower volatility than Nifty 50, it makes no sense to use the blend to replicate it as the USP of low volatility would be lost.

Video Version

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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
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